A Time of Opportunities in Latin AmericaJuan Pablo Cuevas, Head of Global Transaction Services, Latin America and the Caribbean, Bank of America Merrill LynchThose of us holding our breath for a surge in Latin American economic growth may have to wait a while longer – but a rising middle class, abundant natural resources and progress towards more open markets combine to make a strong case for investment.

A Time of Opportunities in Latin America

Those of us holding our breath for a surge in Latin American economic growth may have to wait a while longer – but a rising middle class, abundant natural resources and progress towards more open markets combine to make a strong case for investment.

An economic renaissance for the region was widely predicted just a decade ago yet, according to the International Monetary Fund (IMF), regional growth has slowed for four consecutive years, from a peak of 6.1% in 2010, to 1.3% in 2014.

Faced with those figures, it might be tempting to look elsewhere for business expansion – but that would be to miss out on the very real opportunities for growth and progress that lie behind the headline numbers. Those opportunities are driven by two main factors: the emergence of a middle class of more affluent consumers and a move to lower barriers between markets in the region. A third factor, offset recently by falling commodity prices, is the region’s abundance of natural resources.

The rise of the middle-class consumer

According to a recent World Bank report (Economic Mobility and the Rise of the Latin American Middle Class, October 2012), the middle class in Latin America grew by 50%, from 103 million to 152 million, between 2003 and 2009. According to World Bank Group president, Jim Yong Kim, “Over the past decade, Latin America and the Caribbean have made tremendous progress in reducing poverty and in boosting shared prosperity. Poverty has fallen by half to 12.3 percent. The middle class — currently 34 percent of the population — is growing. Meanwhile, inequality in Latin America — historically the world’s highest — has fallen, even as it rises in practically every other part of the globe.”[1]

This growing prosperity is creating an attractive opportunity for retailers, healthcare providers, insurance companies and corporates in many other sectors. Not only multinationals can benefit from the growing power of Latin America’s consumers: US middle market companies are also looking closely at the region.

Lower barriers, rising trade

As this new class of consumers emerges, business in the region is also starting to benefit from an opening up of barriers to trade. Two organisations are leading the way: first, the Pacific Alliance free-trade bloc, which includes Chile, Colombia, Mexico, Peru and Costa Rica, is designed to increase both intra-regional trade and trade with Asia. Its members already have free-trade agreements with many other countries, including the US and Japan.

By reducing tariffs and lowering non-tariff barriers to free trade, the Pacific Alliance works to create growth and increase opportunities for both domestic corporates and foreign multinationals.

Second, the Mercado Integrado Latinoamericano (MILA) initiative has similar goals to the Pacific Alliance, but was created for the region’s stock markets. MILA aims to integrate the stock exchanges and depositories of Chile, Colombia, Mexico and Peru to promote the growth of trading activity in member countries.

MILA is already one of the world’s most successful stock exchange integration projects, providing an efficient and competitive infrastructure with the ability to access multiple markets in a straightforward way. It creates the scale necessary to attract increased investment by international and local pension and insurance funds, while also offering new opportunities for companies seeking to raise capital.

Resilience in adversity

Brazil’s rapid growth has led the way for the region, but structural reform is vital if its economy is to prosper in the face of sharply lower commodity prices, tighter fiscal and monetary policies and a drop in investment by some of its largest companies. It also needs to diversify its economy as growth in China, its largest trading partner and a major buyer of its commodities, declines[2].

While the challenges facing Brazil are significant, the reaction to them by corporates and investors gives grounds for optimism: 25 years ago, investors faced by an economic slowdown in the country would simply have exited the region, resulting in contagion effects in other countries in Latin America. Now, while the inflow of capital to Brazil has slowed, it has not stopped. Just as important, there are signs that some of that capital is being reallocated to other countries in the region, such as Chile, rather than leaving the region altogether.[3]

Notes

[1] “For the First Time, More Latin Americans Are Middle Class Than Poor,” Young Kim, Jim, The World Post, June 3, 2015[2] Chinese Gross domestic product (GDP) grew an annual 7.0% in the first quarter, slowing from 7.3% in the fourth quarter of 2014, according to China’s statistics bureau[3] United Nations ECLAC Foreign Direct Investment in Latin America and the Caribbean, 2015, fig. I.6